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The Short Selling Regulation in the EU: Assessing the Authorization Granted for ESMA to Prohibit Short Selling

European Journal of Government and Economics

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Title The Short Selling Regulation in the EU: Assessing the Authorization Granted for ESMA to Prohibit Short Selling
 
Creator Huhtilainen, Matias
 
Subject Short selling; Regulation; Intervention; Treatment effect
G01; G18; K20
 
Description The paper discusses the renewed short selling regulation (Regulation (EU) No 236/2012) in the European Union. The focus is on the provisions that deal with prohibiting short selling in exceptional market circumstances. The Regulation further enforces certain obligations to report and disclose short positions. It is concluded that banning short selling is not an effective tool to contain extreme price volatility. The difference-in-differences regression and repeated measures GLM were used to test whether short selling bans were successful in containing volatility of those Spanish and Italian stocks that were subject to two back-to-back prohibitions during the years 2011-2013. The results are consistent with the majority of previous research, suggesting that the effectiveness of short sale constraints in reducing volatility is limited at best. Furthermore, there are evidence of counterproductive effects: constraints on short selling may actually increase volatility as well as deteriorate liquidity. However, based on theory and previous studies, reporting and disclosure requirements shall be favored provided they improve market efficiency as well as supervisory work of regulatory bodies.This paper discusses the renewed short selling regulation (Regulation (EU) No 236/2012) in the European Union. The focus is on the provisions that deal with prohibiting short selling in exceptional market circumstances. The Regulation further enforces certain obligations to report and disclose short positions. It is concluded that banning short selling is not an effective tool to contain extreme price volatility. The difference-in-differences regression and repeated measures GLM were used to test whether short selling bans were successful in containing volatility of those Spanish and Italian stocks that were subject to two back-to-back prohibitions during the years 2011-2013. The results are consistent with the majority of previous research, suggesting that the effectiveness of short sale constraints in reducing volatility is limited at best. Furthermore, there are evidence of counterproductive effects: constraints on short selling may actually increase volatility as well as deteriorate liquidity. However, based on theory and previous studies, reporting and disclosure requirements shall be favored provided they improve market efficiency as well as supervisory work of regulatory bodies.
 
Publisher Europa Grande
 
Contributor —
 
Date 2017-07-07
 
Type info:eu-repo/semantics/article
info:eu-repo/semantics/publishedVersion
Peer-reviewed Article
 
Format application/pdf
 
Identifier http://www.ejge.org/index.php/ejge/article/view/97
 
Source European Journal of Government and Economics; Vol 6, No 1 (2017); 5-23
2254-7088
 
Language eng
 
Relation http://www.ejge.org/index.php/ejge/article/view/97/72
 
Rights Copyright (c) 2017 Matias Huhtilainen
http://creativecommons.org/licenses/by/4.0